Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Nike Inc. NIKE INC. Consolidated Income Statements May 31, May 31, For Year Ended ($ millions) 2019 2018 Revenues $39,117 $36,397 Cost of sales 21,643 20,441 Gross profit 17,474 15,956 Demand creation expense 3,577 Operating overhead expense 8,949 7,934 Total selling and administrative expense 12,702 11,511 Interest expense (income), net 49 54 Other (income) expense, net Income before income taxes 4,801 4,325 Income tax expense Net income $4,029 $1,933 3,753 (78) 66 772 2,392 NIKE INC. Consolidated Balance Sheets May 31, May 31, 2019 2018 $4,466 $4,249 197 996 4,272 3,498 5,622 5,261 1,968 1,130 16,525 15,134 4,744 4,454 283 285 154 154 2,011 2,509 $23,717 $22,536 $6 $6 9 336 $ millions Current assets Cash and equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Identifiable intangible assets, net Goodwill Deferred income taxes and other assets Total assets Current liabilities Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Commitments and contingencies (Note 18) Shareholders' equity Common stock at stated value: Class A convertible315 and 329 shares outstanding Class B1,253 and 1,272 shares outstanding Capital in excess of stated value Accumulated other comprehensive income (loss) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 2,279 2,612 5,010 3,269 229 150 7,866 3,464 6,040 3,468 3,216 3,347 - 3 3 3 7,163 6,384 231 (92) 1,643 3,517 9,040 9,812 $23,717 $22,536 Required a. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for 2019. The company's NNO is negative because cash exceeds debt. NOA: $ 7,856 NNO: $ (1,184) b. Compute net operating profit after tax (NOPAT) for 2019 assuming a federal and state statutory tax rate of 22%. Note: Round your answer to the nearest whole dollar. NOPAT: $ 4,006 c. Use the parsimonious forecast method, as shown in the Analysis Insight box on page 14-5, to forecast sales, NOPAT, and NOA for 2020 through 2023 using the following assumptions. Sales growth 896 Net operating profit margin (NOPM) 2019 ratios rounded to three decimal places Net operating asset turnover (NOAT), year-end 2019 ratios rounded to three decimal places Forecast the terminal period value assuming a 2% terminal period growth and using the NOPM and NOAT assumptions above. Note: Round your final answers to the nearest whole dollar. Nike (NKE) Forecast Horizon Reported Terminal ($ millions) 2019 2021 2022 2023 Period Sales $ $ 39,117 $ $ 42,240 x $ 43,020 x $ 40,270 x $ 53,218$ 54,283 NOPAT OX OX NOA 7,830 x 2020 400 X d. Estimate the value of a share of Nike's common stock using the residual operating income (ROPI) model as of May 31, 2019; assume a discount rate (WACC) of 6.8% and common shares outstanding of 1,682 million. Note: Round your final answer to two decimal places (for example, round $15.555 to $15.56). Stock price per share: $ 0 x e. Nike's stock closed at $86.70 on July 23, 2019, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? Stock price is overvalued Forecasting with the Parsimonious Method and Estimating Share Value Using the ROPI Model Following are income statements and balance sheets for Nike Inc. NIKE INC. Consolidated Income Statements May 31, May 31, For Year Ended ($ millions) 2019 2018 Revenues $39,117 $36,397 Cost of sales 21,643 20,441 Gross profit 17,474 15,956 Demand creation expense 3,577 Operating overhead expense 8,949 7,934 Total selling and administrative expense 12,702 11,511 Interest expense (income), net 49 54 Other (income) expense, net Income before income taxes 4,801 4,325 Income tax expense Net income $4,029 $1,933 3,753 (78) 66 772 2,392 NIKE INC. Consolidated Balance Sheets May 31, May 31, 2019 2018 $4,466 $4,249 197 996 4,272 3,498 5,622 5,261 1,968 1,130 16,525 15,134 4,744 4,454 283 285 154 154 2,011 2,509 $23,717 $22,536 $6 $6 9 336 $ millions Current assets Cash and equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Identifiable intangible assets, net Goodwill Deferred income taxes and other assets Total assets Current liabilities Current portion of long-term debt Notes payable Accounts payable Accrued liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes and other liabilities Commitments and contingencies (Note 18) Shareholders' equity Common stock at stated value: Class A convertible315 and 329 shares outstanding Class B1,253 and 1,272 shares outstanding Capital in excess of stated value Accumulated other comprehensive income (loss) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 2,279 2,612 5,010 3,269 229 150 7,866 3,464 6,040 3,468 3,216 3,347 - 3 3 3 7,163 6,384 231 (92) 1,643 3,517 9,040 9,812 $23,717 $22,536 Required a. Compute net operating assets (NOA) and net nonoperating obligations (NNO) for 2019. The company's NNO is negative because cash exceeds debt. NOA: $ 7,856 NNO: $ (1,184) b. Compute net operating profit after tax (NOPAT) for 2019 assuming a federal and state statutory tax rate of 22%. Note: Round your answer to the nearest whole dollar. NOPAT: $ 4,006 c. Use the parsimonious forecast method, as shown in the Analysis Insight box on page 14-5, to forecast sales, NOPAT, and NOA for 2020 through 2023 using the following assumptions. Sales growth 896 Net operating profit margin (NOPM) 2019 ratios rounded to three decimal places Net operating asset turnover (NOAT), year-end 2019 ratios rounded to three decimal places Forecast the terminal period value assuming a 2% terminal period growth and using the NOPM and NOAT assumptions above. Note: Round your final answers to the nearest whole dollar. Nike (NKE) Forecast Horizon Reported Terminal ($ millions) 2019 2021 2022 2023 Period Sales $ $ 39,117 $ $ 42,240 x $ 43,020 x $ 40,270 x $ 53,218$ 54,283 NOPAT OX OX NOA 7,830 x 2020 400 X d. Estimate the value of a share of Nike's common stock using the residual operating income (ROPI) model as of May 31, 2019; assume a discount rate (WACC) of 6.8% and common shares outstanding of 1,682 million. Note: Round your final answer to two decimal places (for example, round $15.555 to $15.56). Stock price per share: $ 0 x e. Nike's stock closed at $86.70 on July 23, 2019, the date the Form 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? Stock price is overvalued